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Investor Education
By Peet Serfontein.
The concept of a bull and bear market is pivotal in understanding fluctuations in investment performance.
A bull market, characterised by a sustained increase in market prices, often reflects a period of economic growth, investor confidence, and positive performance in corporate earnings. Investors are driven by optimism and the expectation of strong returns. During such a market investment are often aggressive, focusing on growth equities and sectors expected to outperform.
A bear market, by contrast, is marked by a continuous decline in market prices and is usually accompanied by an economic downturn and widespread investor pessimism. Investor sentiment is typically dominated by fear and caution. Investment strategies in bear markets tend to be conservative, with a focus on value equities, defensive sectors, and increased cash holdings.
These market phases are not just crucial indicators for investors and traders, but they also provide insights into broader economic health globally and in a specific nation.
History and evolution
The origins of the terms "bull" and "bear" are rooted in historical anecdotes and metaphors related to the animals' attack styles. The bull, thrusting its horns upwards, symbolises the upward movement of the market, while the bear, swiping its paws downward, represents a declining market.
Historically, the evolution of these markets can be traced back to the early equity exchanges in the 17th and 18th centuries. The Amsterdam Equity Exchange, established in 1602, is often considered the world's first equity exchange, and it was here that the first semblance of bull and bear market dynamics was observed.
Over the centuries, as global economies grew and became more interconnected, the impact of bull and bear markets became more pronounced, often correlated with major economic events, technological advancements, and geopolitical shifts.
Causes of bull and bear markets
Bull markets are often triggered by periods of strong economic growth, characterised by rising GDP, low unemployment, and increased corporate earnings. These conditions foster consumer and business confidence, leading to increased spending and investment. Accommodative monetary policies, such as low interest rates and quantitative easing, can also fuel bull markets by making borrowing cheaper and encouraging investment in equities. Additionally, technological innovations or sector-specific developments can stimulate market optimism, as seen in the tech-driven bull market of the 1990s. Recently, advancements in Artificial Intelligence (AI) has had a significantly positive impact on equity markets.
Bear markets frequently stem from economic downturns, where declining GDP, high unemployment, and reduced consumer spending create a cycle of negativity and risk-aversion among investors. External shocks, such as geopolitical crises, natural disasters, or pandemics can rapidly alter market dynamics, leading to bear markets. Rising interest rates or tightening monetary policies can also trigger a bear market by increasing the cost of borrowing and reducing liquidity in the economy. Market psychology also plays a crucial role; investor sentiment can turn negative due to various factors, including political instability, market speculation, or financial bubbles bursting. This pessimism can lead to widespread selling, further driving down equity prices.
Bull market examples
- Post-World War II boom (1950s): This era saw a significant rise in equity prices, fuelled by post-war reconstruction, technological innovation, and an increase in consumer demand. In particular, the US economy benefitted from its position as a global industrial leader.
- Tech-Driven Bull market (1990s): The advent of the internet and the growth of technology companies led to a significant bull market. This period, often referred to as the dot-com bubble, saw massive investments in technology equities, driving market indices to record highs.
- Post-Financial crisis recovery (2009 onwards): Following the Global Financial Crisis of 2008, markets experienced a prolonged bull run, supported by accommodative monetary policies, including low interest rates and quantitative easing. This period saw significant growth in various sectors, including technology, healthcare, and consumer goods.
Bear market examples
- The Great Depression (1930s): Following the equity market crash of 1929, the US and many other countries entered the Great Depression, the worst economic downturn in modern history. Equity markets plummeted, unemployment soared, and deflation set in, causing widespread economic distress.
- Oil crisis (1973-1974): The oil embargo by OPEC nations led to skyrocketing oil prices and high inflation, triggering a global bear market. Equity prices fell sharply, and many economies faced severe stagflation (a combination of stagnant growth and high inflation).
- Global Financial Crisis (2007-2008): Triggered by the collapse of the US housing market and the failure of several major financial institutions, this crisis led to a severe global recession. Equity markets worldwide saw steep declines, and the crisis led to significant regulatory and policy changes in the financial sector.
Modern market dynamics
Along with the impact that globalisation has had, the modern financial landscape is heavily influenced by technology.
- Globalisation significantly influences the dynamics of bull and bear markets, primarily through the interconnectedness of the world's economies. This interconnectedness means that events in one region impact financial markets worldwide.
- Advances in technology have led to the rise of algorithmic trading, high-frequency trading, and increased market volatility.
- Recent trends also include the growing influence of retail investors, the rise of sustainable and responsible investing, and the impact of social media and online platforms on investment decisions and market sentiments.
It is important to understand market phases to better navigate future market cycles, prepare for potential economic downturns, and capitalise on the opportunities they present. As global economies continue to evolve, the lessons learned from past bull and bear markets will remain invaluable in shaping future financial strategies and economic policies.
Navigating bull and bear markets
It is important to remember that bear markets are quite normal and occur every 10 to 15 years or so. The stock market has survived every previous bear market and has made a full recovery (and then some) in every instance. It remains vital to stay the course during this time and importantly to not panic during bear markets - rather view pronounced downturns as providing an opportunity to buy quality assets at discounted valuations.
Bull markets can, at times, trigger irrational optimism. It is therefore important to stay in your profit levels - be it using fundamental or technical analysis techniques. Be strict in "taking money off the table" at regular intervals and look for opportunities that offer more value as opposed to staying steadfastly invested in expensive assets.
